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Mexico Losing Its Luster for Foreign Investors

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Times Staff Writer

Foreign direct investment is flowing into Mexico at the slowest pace in six years, the latest piece of bad news for a weak economy that is struggling to create growth and jobs.

Foreign companies plowed $7.5 billion into plants, equipment and businesses in Mexico during the first half of the year, according to recently released government figures. That’s down 36% from the same period a year earlier, and it’s the poorest first-half showing since 1999.

At a time when rivals such as China are attracting record amounts of foreign direct investment the falloff is raising concerns that Mexico is losing its appeal as a place for multinationals to expand.

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“Foreign investors don’t see a lot going on here to excite them,” said independent Mexico City economist Rogelio Ramirez de la O. “We have lost momentum.”

Foreign direct investment represents stakes by foreigners in a nation’s productive capacity, including real estate, machinery, factories, banks, warehouses, offices and stores. It’s a gauge of the recipient country’s competitiveness as well as a bet on its economic potential.

Passage of the North American Free Trade Agreement in 1994 helped turn Mexico into an investment magnet. Since 1994, the nation has attracted more than $172 billion in foreign direct investment, most of it from the United States.

But stalled economic reforms in Mexico coupled with the rise of Asia have many of those investors looking east, not south.

Mexico last year ranked 22nd, just above Indonesia, among the world’s most attractive destinations for direct investment, according to a survey of the world’s 1,000 largest companies conducted by consulting firm A.T. Kearney Inc.

It was the first time in the survey’s seven-year history that Mexico fell out of the top 10, according to Paul Laudicina, vice president of A.T. Kearney. China has ascended to the top of the heap, with India claiming the No. 3 spot, just behind the United States.

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“Mexico clearly lost position vis-a-vis China and other lower-cost labor markets,” Laudicina said.

To be sure, foreign direct investment can vary wildly from quarter to quarter. Mexico last year rebounded from a two-year slide to attract just over $17 billion. That’s about what it garnered in 2000 when global foreign direct investment peaked at $1.4 trillion during the height of the dot-com boom. And it’s a level that government officials say the nation could still hit by the end of this year.

Even so, remittances sent home by low-wage immigrants living in the U.S. almost certainly will surpass the sums invested in Mexico by multinationals in 2005.

That’s hardly an encouraging trend for the world’s 10th-largest economy.

Although remittances are a lifeline for many poor Mexicans, who use them mainly to buy consumer goods, they don’t create the jobs and wealth that come with new factories, stores and other businesses. Many economists view the estimated $20 billion in remittances that will flow to Mexico this year as a weakness, not a strength, of its economy.

Meanwhile, Asia is grabbing an ever greater percentage of direct investment heading to the world’s developing nations as companies seek low-cost production and proximity to the region’s teeming consumer markets.

As recently as 2000, Latin America and the Caribbean nabbed $98 billion, or nearly 40%, of all the foreign direct investment in the developing world, according to figures from the United Nations Conference on Trade and Development. Last year, that figure had fallen to an estimated $69 billion, a decline of nearly 30%.

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Foreign direct investment to Asia has jumped 16% during the same period to an estimated $166 billion. That’s impressive considering that total world foreign direct investment last year was less than half of what it was in 2000. Asia last year accounted for nearly two-thirds of all business investments in the developing world.

But Vincent Palmade, an expert on foreign investment, said some comedown for Mexico and Latin America was to be expected.

He pointed out that billions flowing to the region in the last few decades had come from “one-off” privatizations of state-owned industries, which provide huge surges in investment that can’t be sustained.

“It’s more a question of China catching up and Latin America falling from an artificial peak,” said Palmade, lead economist with the Foreign Investment Advisory Service, which is part of the World Bank Group.

Certainly the news isn’t all bad for Latin America. Last year’s figures marked a robust 35% rise in foreign direct investment for the region compared with 2003, according to United Nations data. High demand for oil, copper and other commodities has foreigners sinking new investment into the region.

Mexico could get a big boost in 2006 when it is slated to sell its state-owned airlines, which have attracted considerable interest from foreign carriers. Arkansas-based Wal-Mart Stores Inc., the world’s largest retailer, is planning further expansion in Mexico. A healthy tourism sector continues to draw interest from foreign developers. And Mexico’s proximity to the U.S. remains an important strategic advantage that keeps drawing companies from abroad.

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“Mexico remains a very attractive place for investment,” said Sergio Juarez Plata, an official with Mexico’s Economy Secretariat.

But others see major challenges, particularly in Mexico’s manufacturing sector, which accounted for about half of the foreign direct investment coming into the country in the last decade.

Mexico’s largest factory sectors -- electronics, apparel and autos -- have been hammered in recent years. Thousands of maquiladora export factory jobs have vanished since 2000. Much of the low-value electronics and apparel assembly work has migrated to Asia and won’t be back, at least not anytime soon.

Meanwhile, Mexico’s automotive sector, which is dominated by General Motors Corp., Ford Motor Co. and DaimlerChrysler, has been suffering from weak consumer demand in the United States for the Big Three’s vehicles. Assembly line employment has declined by nearly 20% in Mexico since 2000.

Mexican officials say they are working hard to attract automakers from Japan, Europe and elsewhere to diversify the automotive base. But China and India are emerging as ferocious rivals.

“Unfortunately we’re competing in very traditional sorts of industries with these other countries,” said economist Ramirez de la O. “After electronics, textiles and autos, there isn’t much left because we don’t do much high-tech here in Mexico.”

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He and others say foreign investors have been deterred by Mexico’s failure to implement needed reforms for its energy sector, legal system, labor code and tax collection network.

Poor infrastructure is hurting its chances as well. A recently released World Bank study said that Latin America had fallen well behind Asian rivals in investing in airports, highways and other crucial infrastructure, a deficit that is stunting the region’s productivity and competitiveness.

Latin America would have to double, even triple, its infrastructure spending as a percentage of gross domestic product to catch up to countries such as South Korea and China that once trailed it, according to the report.

In Mexico, lawlessness along the border, entrenched government corruption and thickets of red tape also are taking a toll.

Los Angeles-based T-shirt manufacturer American Apparel Inc. last month opened its first retail stores south of the border, in Playa del Carmen and Mexico City.

It’s the start of what company founder Dov Charney said he hoped would become a 20-store, $6-million investment in Mexico over the next two years.

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American Apparel already operates stores in the U.S. and seven other countries, including South Korea, Switzerland and Germany. Outlets in Japan and Israel are opening soon. Charney said Mexico was the toughest place in which he had tried to open a business.

Because all the company’s products are manufactured at American Apparel’s factory in downtown Los Angeles, all the T-shirts, underwear and sportswear stocked in the Mexico stores must be imported from the United States.

Charney said Mexico’s customs regulations lead to delays and endless paperwork. He said employment red tape was cumbersome. Even getting the stores equipped with credit card machines has proved to be a hassle, he said.

“Mexico is shooting itself in the foot with this stuff,” said Charney, who is paying his starting-level employees $6.67 an hour, more than many Mexicans earn in a day. “The barriers to entry are too great.”

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